Indian business hoping for/predicting a Modi/BJP landslide

The Great Indian Election Tamasha comes to an end on Monday and the results will be announced by the Election Commission on Friday, May 16th.

The Indian Stock Exchange (BSE Sensex) is riding very high. On Friday the index reached record levels and rose almost 3%. Business is looking for a stable and effective government. The last term of the Congress led government was one of the most ineffective terms of any government. Not least due to the coalition government which was virtually paralysed in the arms of its many and varied partners. Each of the regional coalition partners were more interested in cashing-in (politically and economically) than in governing or governance. The BJP in opposition was a party of disruption and their objective was to ensure and show that the government was ineffective. Parliament was more often disrupted than in session.

Insofar as the Stock Exchange reflects the hopes and predictions of the business community, a Narendra Modi / BJP government is certain. Two years ago I would have thought this was not possible but by December 2012, I became convinced that Narendra Modi would be the next Prime Minister.  As the election has progressed and the Modi wave has been sustained, the stock exchange has moved inexorably upwards. The new kids on the block – the Aam Admi Party – had threatened to be a spoiler for Modi (and it could still happen) but they are increasingly looking lost. Their leader’s resignation as Chief Minister of Delhi has only strengthened the view that the party lacks substance. They can make a noise and oppose anybody and anything, but they are scared of – and incapable of – governing.

Back in February this year it became clear that the election would be held at the end of the government’s mandate in April. The actual dates were announced by the Election Commission on March 7th. The optimism in the markets has grown steadily.

Sensex after election announcement 2014 (chart from Bloomberg)

Sensex after election announcement 2014 (chart from Bloomberg)

Indian business, in my experience, is more concerned about the stability and rationality and continuity of government rather than the manifestos of the various parties. They dislike subsidy policies introduced just to woo voters – but are expert at milking subsidies when available. They prefer the slightly more free-market approach of the BJP and are suspicious of ideological socialism and protectionism. But they have had no difficulty with working with Congress led governments as well. What they just don’t want is another government which cannot overcome the internal strains of a coalition and cannot govern. Uncertainty is the prime enemy.

So if the stock exchange is a predictor of the election result then we can expect that Narendra Modi and his BJP will not only win but may even come close to an outright majority. If that happens we can expect a sharp index spike on Monday 19th May – perhaps +4-5%. But if there is no overall majority for Narendra Modi, then we could see the markets fall also very sharply. The Sensex reached 23,000 last Friday. By next Friday it could have crept upto about 24,000. Then depending upon Modi’s majority it could spike to over 25,000. But if Modi has no clear majority and another wishy-washy government is in prospect, it could drop to around 22,000 (-10%).

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